An Overview of Estate Taxes
A federal estate tax is collected when a person dies and his or her assets are transferred to the heirs. An estate is all the property and assets a person owns.
What Is an Estate?
Your "estate" consists of all property owned by you at the time of your death, including:
- Real estate
- Bank accounts
- Stocks and other securities
- Life insurance policies
- Personal property such as automobiles, jewelry, and artwork
The total tax due is calculated by adding up the fair market values of all of the decedent's assets on the date of death and then applying estate tax credits and subtracting out allowable estate tax deductions.
Who Pays Estate Taxes?
The estates of every U.S. citizen are subject to the federal estate tax. If an elderly parent dies and you are the heir to the estate, you are responsible for federal estate taxes.
What Is an Estate Plan?
Mielke says estate planning is one of the most important steps any person can take to make sure that their final property wishes are honored, and that loved ones are provided for in their absence. Estate planning is often overlooked and put off in favor of more immediate concerns. But a comprehensive estate plan can resolve a number of legal questions that arise whenever someone dies: What property and assets do they own? Who gets what? How much tax will need to be paid in order to transfer property ownership? What funeral arrangements are appropriate?
Who Needs an Estate Plan?
"Everyone needs an estate plan," Mielke says. "If you are an adult of legal age, you need some documentation in place regarding your estate. An estate plan doesn't have to be complex."
Estate plans list all of your assets, and how they will be transferred should you die. If you don't have an estate plan, the state you live in will determine who gets your assets.
All estate plans should include, at minimum, two important estate planning instruments: a durable power of attorney (POA) and a will. The POA is for managing your property during your life, in case you are ever unable to make decisions for yourself. The will is for the management and distribution of your property after death. In addition, more and more, Americans also are using revocable (or "living") trusts to avoid probate and to manage their estates both during their lives and after they're gone.
The best way to ensure your elderly parents – as well as yourself – have the proper documents in order, is to work with a qualified Financial Planner.